Chapter 4 Cash Flow Finance Test Two Stu
Finance: Test Two Study Guide
Chapter 4
Cash Flow:
A. Operating: cash flows directly related to sale and production of the
firm’s products and services.
B. Investing: cash flows associated with purchase and sale of both fixed
assets and equity investments in other firms.
C. Financing: cash flows that result from debt and equity financing
transactions; include incurrence and repayment of debt, cash inflow
from sale of stock, and cash outflow to repurchase stock or pay cash
dividends.
Financial Planning Process: Begins with long-term, or strategic, financial
plans that in turn guide the formulation of short-term, or operating, plans
and budgets.
A. Long-term (strategic) financial plans: lay out a company’s planned
financial actions and the anticipated impact of those actions over
periods ranging from 2 to 10 years.
B. Short-term (operating) financial plans: specify short-term financial
actions and the anticipated impact of those actions. Key inputs include
sales forecast and other operating and financial data. Key outputs
include operating budgets, the cash budget, and pro forma financial
statements.
Begins with Sales Forecast, from that production plans are developed that
consider lead times and raw material requirements. From production
plans, direct labor, factory OH, and operating expense estimates are
developed. From this information, the pro forma income statement and
cash budget are prepared- ultimately leading to the development of the
pro forma balance sheet.
Pro-forma financial statements: Projected, or forecast, income
statements and balance sheets.
Weaknesses: the firm’s past financial performance will be replicated in the
future, and that certain variables (cash, A/R, and inventories) can be forced
to take on certain “desired” values.
Strengths: can be use them to analyze the firm’s inflows and outflows of
cash, various ratios can be calculated from the statements, cash inflows and
outflows can be evaluated by preparing pro forma statement of cash flows,
after viewing pro-forma statements manager can take steps to adjust
planned operations to achieve short-term financial goals
Finance: Test Two Study Guide
Chapter 5
Present value: current dollar value of a future amount- the amount of
money that would have to be invested today at a given interest rate over a
specified period to equal future amount.
Formula: FVn / (1+r)n
Future value: value at a given future date of an amount placed on deposit
today and earning interest at a specified rate. Found by applying compound
interest over specified period of time.
Formula: FVn= PV x (1 + r)
n
Compound interest: Interest that is earned on a given deposit and has
become part of the principal at the end of a specified period.
Annuity: a stream of equal periodic cash flows, over a specified time period.
These cash flows can be inflows of returns earned on investments or outflows
of funds invested to earn future returns
Annuity due: is an annuity for which the cash flow occurs at the beginning
of each period
Cash Flow Patterns:
Single Amount: a lump sum amount either held currently or expected at
some future date.
Mixed Stream: A stream of unequal periodic cash flows.
Perpetuity Problem: PV of a perpetuity= PMT / r
PMT= expected cost
Example: 6,000 / .10= 60,000
Using table “FV of ordinary annuity” get factor.
Chapter 4
Cash Flow:
A. Operating: cash flows directly related to sale and production of the
firm’s products and services.
B. Investing: cash flows associated with purchase and sale of both fixed
assets and equity investments in other firms.
C. Financing: cash flows that result from debt and equity financing
transactions; include incurrence and repayment of debt, cash inflow
from sale of stock, and cash outflow to repurchase stock or pay cash
dividends.
Financial Planning Process: Begins with long-term, or strategic, financial
plans that in turn guide the formulation of short-term, or operating, plans
and budgets.
A. Long-term (strategic) financial plans: lay out a company’s planned
financial actions and the anticipated impact of those actions over
periods ranging from 2 to 10 years.
B. Short-term (operating) financial plans: specify short-term financial
actions and the anticipated impact of those actions. Key inputs include
sales forecast and other operating and financial data. Key outputs
include operating budgets, the cash budget, and pro forma financial
statements.
Begins with Sales Forecast, from that production plans are developed that
consider lead times and raw material requirements. From production
plans, direct labor, factory OH, and operating expense estimates are
developed. From this information, the pro forma income statement and
cash budget are prepared- ultimately leading to the development of the
pro forma balance sheet.
Pro-forma financial statements: Projected, or forecast, income
statements and balance sheets.
Weaknesses: the firm’s past financial performance will be replicated in the
future, and that certain variables (cash, A/R, and inventories) can be forced
to take on certain “desired” values.
Strengths: can be use them to analyze the firm’s inflows and outflows of
cash, various ratios can be calculated from the statements, cash inflows and
outflows can be evaluated by preparing pro forma statement of cash flows,
after viewing pro-forma statements manager can take steps to adjust
planned operations to achieve short-term financial goals
Finance: Test Two Study Guide
Chapter 5
Present value: current dollar value of a future amount- the amount of
money that would have to be invested today at a given interest rate over a
specified period to equal future amount.
Formula: FVn / (1+r)n
Future value: value at a given future date of an amount placed on deposit
today and earning interest at a specified rate. Found by applying compound
interest over specified period of time.
Formula: FVn= PV x (1 + r)
n
Compound interest: Interest that is earned on a given deposit and has
become part of the principal at the end of a specified period.
Annuity: a stream of equal periodic cash flows, over a specified time period.
These cash flows can be inflows of returns earned on investments or outflows
of funds invested to earn future returns
Annuity due: is an annuity for which the cash flow occurs at the beginning
of each period
Cash Flow Patterns:
Single Amount: a lump sum amount either held currently or expected at
some future date.
Mixed Stream: A stream of unequal periodic cash flows.
Perpetuity Problem: PV of a perpetuity= PMT / r
PMT= expected cost
Example: 6,000 / .10= 60,000
Using table “FV of ordinary annuity” get factor.